Trunkbow A U.S.-Listed Chinese 'Mobile Payment' Company Also Going Private

Trunkbow (NASDAQ:TBOW) announced the receipt of a "Going Private" Proposal on November 2. The chairman and the CEO are proposing to offer $1.46 in cash for all of the outstanding shares of the company's common stock that are not beneficially owned by the consortium members.

I was just finishing my article about Trunkbow but then the news about the proposal hit my screen. It's a pity because I saw a great future for this Chinese company on the Nasdaq. In my opinion the proposal price of $1.46 is too low.

Trunkbow International

Trunkbow was founded in 2001 and is a leading provider of technology platform solutions in China that enables telecom service providers to deploy mobile value-added service applications for their subscribers. In 2009, Trunkbow began rolling out its mobile payments platform initially throughout the province of Shandong, nowadays the company supplies its mobile payment solutions to all three Chinese mobile telecom operators, as well as re-sellers, in several provinces of China.

VeriFone Holdings, Inc. was the co-lead investor in the reverse merger financing for Trunkbow International in 2009. VeriFone invested $5.0 million of the approximately $22.5 million raised, giving VeriFone a pro-forma fully diluted ownership stake of 8.6%.

The main activities of Trunkbow are providing Mobile Payment Solutions and Mobile Value Added Solutions. Mobile Payment Solutions ("MPS") allows for the purchase of items with a mobile phone, facilitating both remote mobile payment and point of sale ("POS") mobile payment. Remote mobile purchases are enabled through SMS, WAP, and WEB interfaces.

The company uses proprietary technologies to transmit secure transaction data between end users and the financial processing infrastructure. A proprietary software technology platform resides within the telecom operators' network as well as the merchant clearing house network in order to seamlessly facilitate mobile payment transactions.

China's Mobile Payment Market

China will have the world's largest mobile payments market by 2015, according to a report from Kapronasia, an advisory and consulting group focused on the Chinese financial tech sector.

The report, titled "Mobile Payments in China," indicated that the Chinese mobile payment market is nearly doubling in size every year and is expected to be worth more than $80 billion with 441 million active users by 2015. China has already overtaken the US as the largest smartphone market in the world, according to Kapronasia. However, the company also noted that the penetration of smart phones in China is still low, as less than 10 percent of the total 900 million mobile phone users own a smartphone.

According to the report, mobile payment users in China reached 218 million at the end of 2011, and is expected to grow to 441 million users by the end of 2015.

China's point-of-sale payments infrastructure is also developing rapidly, with 3.3 million units installed in 2010, triple the number of units in 2007. In addition, the rapid spread of 3G mobile networks and the growth of e-payments acceptance in China's tier-2 and tier-3 markets means that there is significant market potential for mobile payments. By 2013, the Chinese m-payment ecosystem is expected to reach 410 million users, according to another report by Celent.

The growing Chinese mobile payments market is just starting and still faces many challenges. Despite the large mobile user base, most Chinese mobile phone users cannot access mobile payments on their device. A company that is on the forefront of a breakthrough in China is Trunkbow International.

The Role Of Banks

Banks will play a central role in bringing mobile payments to the mass market in China, but questions still remain about what additional services they can provide to consumers beyond straightforward transactions. Trunkbow's Mobile Value Added Solutions could help them to differentiate from their 'transactions only' role within the mobile payments ecosystem.

Trunkbow's announcement that they have been selected to develop and implement a new electronic payment system for China Minsheng Banking Corp is a transition point for the company.

Instead of competing with technology companies, banks can concentrate on doing what they do best: providing customers a safe and trusted environment through which to manage their money. Banks are a critical link in China's emerging m-payments market and in my opinion also very important for Trunkbow.

Trunkbow's Opportunities

Retail and business customers may be willing to pay for value-added services. Alerts regarding security and fraud protection for example.

While most mobile banking technology and applications have been aimed at retail customers, Trunkbow is already taking the concept to business clients.

In August Trunkbow announced that it has entered into a framework agreement with China Communications Services Corporation, Limited for the construction, management and operation of a cloud data center in Guangzhou, China.

Through this data center, Trunkbow and its partners will offer hosted MPS and MVAS platform products to small and medium businesses under Software application as Service ("SaaS") and Platform application as Service ("PaaS") models.

The companies will offer a suite of Trunkbow-powered, cloud-based services including hosting, payment and security, as well as value-added services such as couponing, promotions and location-based services that will provide a one-stop MPS solution for M-commerce and point of sale-based transactions.

Conclusion

China's fast-growing mobile market, combined with a large and growing consumer economy means that China is poised to become a global leader in mobile payments. Trunkbow will capture a big market share too, because of their great relationships.

In January this year Trunkbow announced that it has entered into a partnership agreement with China UnionPay ("UnionPay"), China's leading bankcard association, for the development and marketing of the Trunkbow UnionPay mobile payment applet. Under the agreement, Trunkbow is developing a UnionPay-certified plug-in applet that will enable m-commerce transactions through UnionPay's clearing system.

In addition to development and aftermarket support of the applet, the companies will work together to develop and expand the Trunkbow UnionPay merchant network, and market the m-commerce solution to China's nearly 1 billion mobile phone users.

The Trunkbow UnionPay mobile payment applet can be incorporated into any existing mobile application to facilitate simple, secure online payments from a user's mobile phone. Representative transactions include the payment of utility and other bills, purchase of lottery, movie and event tickets, online gaming credits, e-books as well as physical goods from online and brick-and-mortar merchants utilizing the applet.

With a defensible first mover advantage and strong partnerships with China's three wireless carriers and the leading clearing house UnionPay, Trunkbow is well positioned to capture market share in the booming mobile payment market.

The offered price of $1.46 doesn't give a decent valuation of the underlying value of Trunkbow. With a P/E below 5 management acquires the company almost for free. What I said already in my former article: An Exodus Of US-listed China Stocks Is Inevitable.

Shares of Trunkbow are trading now around $1.12, so they still can be bought for an arbitrage profit of $0.34. An upside potential of more than 30% from the current price.

However, there is a possibility that the "the fairness opinion" will lift the proposal price to $1.80. Another possibility could be that VeriFone or UnionPay will come with a better offer. We will just wait and see what happens.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.